The Economic Contribution of Indonesia's Forest-Based Industries - September 2011 September 2011

 
The Economic Contribution of Indonesia's Forest-Based Industries - September 2011 September 2011
The Economic Contribution of
Indonesia’s Forest-Based Industries
September 2011

September 2011
ITS GLOBAL

International Trade Strategies Pty Ltd, trading as ITS Global
Level 1, 34 Queen Street, Melbourne, 3000
Tel: (61) 3 9654 8323
Fax: (61) 3 9654 4922
http://www.itsglobal.net

Commercial-in-confidence. The views expressed in this publication are those of its authors. The consultant
takes no liability for commercial decisions taken on the basis of information in this report. The information is
accurate to the best of the consultant’s knowledge, however the consultant advises that no decision with
commercial implications which depends upon government law or regulation or executive discretion should be
taken by any person or entity without that party’s having secured direct advice from the government agency
concerned in writing.
The Economic Contribution of Indonesia’s Forest Industries                                                                      DRAFT REPORT

Table of Contents
Executive Summary ................................................................................................................................. 5
1. Introduction: Indonesia in Context ................................................................................................. 8
   1.1        Background on Indonesia’s Economy and Society .............................................................. 8
      1.1.1       Indonesia’s Economy ..................................................................................................... 8
   1.2 Indonesia’s forest-based industries......................................................................................... 13
2. Economic and Social Contribution of Indonesia’s Forest-based Industries ...................... 15
   2.1 Economic and Social Contribution of Forestry, Logging and Related Services ........................ 16
      2.1.1 Contribution to GDP ......................................................................................................... 16
      2.1.2 Contribution to employment ............................................................................................. 17
      2.1.3 Contribution to exports (roundwood harvesting)................................................................ 19
      2.1.4 Contribution to Government revenue ................................................................................ 19
      2.1.5 Social contribution............................................................................................................ 21
   2.2 Economic & Social Contribution by Manufacture of Wood and Wood products ........................ 24
      2.2.1 Contribution to GDP (Value-added) .................................................................................. 24
      2.2.2 Contribution to employment ............................................................................................. 25
      2.2.3 Contribution to exports ..................................................................................................... 25
   2.3 Economic and Social Contribution of Pulp and Paper Products ............................................... 27
      2.3.1 Contribution to GDP (Value-added) .................................................................................. 27
      2.3.2 Contribution to employment ............................................................................................. 28
      2.3.3 Contribution to exports ..................................................................................................... 28
      2.3.3 Social contribution of pulp and paper production .............................................................. 29
3. Case Study on APP and Sinar Mas Forestry .................................................................................30
   3.1 APP/SMF operations .............................................................................................................. 30
      3.1.1 Indonesian operations ...................................................................................................... 30
      3.1.2 Operations in Riau Province............................................................................................. 31
   3.2 Contributions to Indonesia ...................................................................................................... 31
      3.2.1 GDP contribution.............................................................................................................. 31
      3.2.2 Contribution to Employment ............................................................................................. 32
      3.2.3 Export contribution ........................................................................................................... 33
      3.2.4 Social contribution............................................................................................................ 33
   3.3 Case Study: Contributions to Riau Province ........................................................................... 34
      3.3.1 Background on Riau ........................................................................................................ 34
      3.3.2 Forest resources, population and land use ....................................................................... 35
      3.3.3 Contribution to Riau’s economy ........................................................................................ 35
      3.3.4 Community impacts ......................................................................................................... 37
      3.3.4 Community Development by Plantation Companies ......................................................... 38
4. Sustainability and Indonesia’s Forest Industries ......................................................................40
   4.1 Global outlook for forest-based products ................................................................................ 40

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   4.2 National outlook for forest resources ...................................................................................... 41
   4.3 Protected forest areas ............................................................................................................ 43
   4.4 Conversion of forest land for other uses ................................................................................. 44
   4.5 Carbon sinks as alternatives to Forestry ................................................................................. 46
Sources ...................................................................................................................................................... 47

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Executive Summary

Indonesia is currently one of the world’s strongest emerging economies. Its growth in
GDP over the past decade has averaged 5.5 percent over the last decade, rising to 6 to7
percent.

It is the world’s fifth most populous country with a population of more than 230
million. Its population has grown strongly – by 70 million people since 1980. It is
expected to increase by 50 million people in the next 20 years.

The people of Indonesia are highly dependent on the agricultural sector for their
livelihoods. Half of Indonesia’s people live in rural areas and half of all Indonesian
households are primarily depend upon agriculture – the cultivation of rice and other
foods, estate crops (such as rubber, coconut, palm oil and coffee), livestock and poultry
and fishing.

Formal income earning opportunities are limited. Of the nearly 100 million people
working in Indonesia, just 37 million are estimated to be employees. Many more are
self-employed and unpaid. Around 40 per cent of the labour force is unemployed or
underemployed. Thirty-eight million are classified as living in poverty and two-thirds
are classified as undernourished.

Despite high levels of poverty and unemployment, Indonesia has increased per capita
GDP year on year. Its sustained growth has in part been due to its large natural
resources base, including forests.

Indonesia is home to some of the most extensive forest land in the world. Forests and
forestry have played a large part in Indonesia’s broader economic development over the
past five decades.

The industry has expanded from craft enterprises and local lumber businesses to an
internationally competitive sector. The forestry sector has for the larger part moved
from localised selective felling for to large-scale plantation development. The forest-
based manufacturing industry has diversified from small manufactures to large-scale
plywood production and most recently pulp and paper production.

The contribution these combined sectors – forestry, wood manufacturing and the pulp
and paper industry – cannot be underestimated.

    -    Combined, the sectors contribute approximately USD 21 billion to Indonesia’s
         GDP, or roughly 3.5 per cent of the national economy;
    -    Wood products and pulp and paper manufacturing represent around 8.3 per cent
         of manufacturing value-added;
    -    The sectors employ a combined total of 3.76 million people; around 4 per cent of
         the working population and roughly 1.5 per cent of the total population;
    -    If employment multipliers are taken into account, this figure is likely to be closer
         to or exceed 4 million people;

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    -    If dependents are taken into account, this equates to more than 15 million people
         dependent upon the sector.

Forestry (harvesting and silviculture) contributes roughly USD 5.1 billion
(approximately 1 per cent) to Indonesia’s GDP. The contribution of forestry harvesting
to employment is particularly significant. While estimates of employment within the
formal forestry sector are around 241,000 according to recent estimates, informal
sector employment is much higher. Plantation forestry alone is responsible for
approximately 713,000 permanent jobs, and approximately 450,000 short-term jobs
annually during plantation establishment. The authors estimate that forest harvesting
contributes approximately 1.3 per cent of government taxation revenues.

The benefits of forestry are likely to be greatest for rural populations where alternative
income earning opportunities are scarce. Forestry operations are directly responsible
for increased employment opportunities as well as infrastructure developments in rural
communities.

Wood and wood manufacturing contributed USD 9 billion (around 1.4 per cent) to
Indonesia’s GDP in 2009. Its share of manufacturing value added was around 2.3 per
cent in the same year. According to one estimate the subsector directly employs more
than 1.3 million people. The sector also makes up around 4 per cent of total non-mineral
exports.

Pulp and paper manufacturing and its associated industrial forest plantations combined
directly employ around 1.51 million people and contribute around 1.8 per cent of GDP.

The pulp and paper industry is a significant contributor to the Indonesian economy,
contributing around 1.2 per cent of GDP, and around 6 per cent of manufacturing value-
added.

Wood products and pulp and paper represent 6 per cent of total exports in 2010 and
around 9 per cent of non-mineral exports.

The development of large-scale pulp and paper operations (including industrial forest
plantations) provides significant benefits at the provincial level.

A case study of Asia Pulp and Paper and its fiber supplier demonstrates its contributions
to the Indonesian economy. APP and Sinar Mas Forestry (SMF) contribute around 0.9
per cent of Indonesia’s GDP. The two companies also directly employ approximately
399,000 people on a full-time basis; its forestry operations also provide for
approximately 252,000 full-time equivalent jobs annually for plantation establishment.
Its pulp and paper exports make up around 2 per cent of Indonesia’s non-mineral
exports.

In Riau in particular, the contributions of APP and Sinar Mas Forestry are more
pronounced. According to one economic analysis, APP and SMF in Riau:

    -    Generate 11 per cent of all provincial economic output;
    -    Employ 5.6 per cent of the total workforce;

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The Economic Contribution of Indonesia’s Forest Industries                   DRAFT REPORT

    -    Contribute 3 per cent of Riau’s tax revenue;
    -    Generate 4.6 per cent of all household income in Riau.

Further, APP’s operations in Riau alone make up around 1.3 per cent of all of
Indonesia’s non-mineral exports.

Despite the large economic benefits generated by the industry, it has been subject to
much criticism, particularly from developed countries for its environmental impacts,
particularly deforestation.

Much of this criticism is misguided.

Indonesia has some of the largest forest resources in the world. Indonesia has classified
over 110 million hectares, or around 60 per cent, of its total land as permanent forest
areas. Roughly half of that area has been conserved for environmental purposes
(equivalent in size to the entire land area of France or Spain) and half for continuing
forestry.

The Indonesian Government has undertaken numerous policy measures to bring down
levels of illegal logging as well as place a moratorium on new forestry developments in
primary forest areas as a means of reducing carbon emissions.

Poverty, agricultural expansion and land tenure issues are major causes of deforestation
and unsustainable land use practices in Indonesia’s forest areas. Commercial forestry
and plantation development alleviates pressure on forest resources by:

 Providing stable, formal employment and economic growth, reducing the need for
  poor land-use practices associated with subsistence agriculture;.
 Providing legal tenure for conservation and community land use;
 Providing environmental stewardship through detailed land use and water use
  management that would otherwise be absent, mitigating against fire outbreaks and
  uncontrolled peat drainage that accompany poor land-use practices.

It is often claimed that forestry resources can deliver comparable or even greater value
to Indonesia if, instead of commercial development they are valued for carbon storage
and trading of carbon credits and developed for non-timber forest products, small-scale
eco-forestry or community forestry. While there is scope for community forestry in Java,
these other activities cannot be demonstrated as delivering comparable economic
returns to current industry arrangements. Recent research has revealed that estimates
of emissions from deforestation in Indonesia have conventionally been over estimated
by around three and a half times. Nor will these proposed alternatives provide stable
tenure or end poor land-use practices associated with poverty.

Indonesia’s forest resources are a valuable resource. The general case has been made
that forestry and plantation development are “either/or” options for Indonesia – either
develop an important economic resource or conserve Indonesia’s forests. There is no
basis for this argument. The large-scale operators in Indonesia’s industry show
sustainable forest management can be practised.
.

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1. Introduction: Indonesia in Context
Indonesia is currently one of the world’s strongest emerging economies. Its growth over
the past decade has seen steady increases in GDP and per capita GDP. The country is also
projected to increase its population significantly in the coming decades.

It is the world’s fifth most populous country with a population of more than 230 million.
Its population has grown strongly – by 70 million people since 1980. It is expected to
increase by 50 million people in the next 20 years.

The people of Indonesia are highly dependent on the agricultural sector for their
livelihoods. Half of Indonesia’s people live in rural areas and half of all Indonesian
households are primarily depend upon agriculture – the cultivation of rice and other foods,
estate crops (such as rubber, coconut, palm oil and coffee), livestock and poultry and
fishing.

Formal income earning opportunities are limited. Of the nearly 100 million people
working in Indonesia, just 37 million are estimated to be employees. Many more are self-
employed and unpaid. Around 40 per cent of the labour force is unemployed or
underemployed. Half of the population is classified as living in poverty (living on less than
US$2 per day) and two-thirds are classified as undernourished.

1.1 Background on Indonesia’s Economy and Society
1.1.1 Indonesia’s Economy

Indonesia is the world’s 15th-largest economy and the largest in South-East Asia.
After a period of robust growth in the 1990s, Indonesia was badly affected by the Asian
financial crisis - experiencing a significant economic downturn in 1997-98. Since the
crisis the Indonesian economy has grown steadily.

       Chart 1.1: Indonesia: Gross domestic product: 1992 to 2009 (USD, constant prices 2000)
                    $300

                    $250

                    $200
         Billions

                    $150

                    $100

                     $50

                      $0
                           1960        1970                  1980          1990   2000
                                                                    Year

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                                  Source: World Bank World Development Indicators 2011

Chart 1.1 shows Indonesia’s annual gross domestic product since 1992. It shows that
Indonesia’s economy grew in real terms between 6.5 and 8.2 per cent annually before
the Asian financial crisis, but that growth fell to 4.7 per cent in 1997. The economy
contracted by 13.1 per cent in 1998. Between 2000 and 2006 growth recovered,
averaging almost 5 per cent annually. It recovered to pre-crisis levels around 2003.

From 2004 to 2009, Indonesia’s GDP grew on average 5.5 per cent per annum,
compared with roughly 3.8 per cent for South Asia, East Asia and the Pacific. This was
largely due to Indonesia’s strong performance during the Global Financial Crisis. 1

            Chart 1.2: Indonesia: GDP per capita (USD, constant prices, 2000): 1992 to 2008

          1200

          1000

           800
    USD

           600

           400

           200

             0
                 1960               1970                 1980                 1990                 2000
                                                                   Year

                                   Source: World Bank World Development Indicators (2011)

Chart 1.2 demonstrates that Indonesia’s GDP per capita was USD 1,124 in 2008. It has
risen by between 3 and 5 per cent annually since 2000 and is now significantly higher
than its pre-crisis level of USD 911 in 1996 and its low of USD 776 in 1998. It is
nevertheless low by international and regional standards.

1.1.2 Demographics and employment

Indonesia is the world’s fourth most populous country.2 Its population continues to
grow very strongly. Indonesia’s population is now more than 237 million people: 87
million more than in 1980 and 57 million more than in 1990. The population is
estimated to grow to more than 250 million by 2015.

1World Bank (2011), World Development Indicators, February 2011
2Fourth behind China, India, and United States. International Monetary Fund (2011) http://www.imf.org/external/data.htm
February 2011

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          Chart 1.3: Indonesia’s population 1960 to 2009, total and rural
                      250

                      200

                      150
           Millions

                      100                                                                                                  Population, total
                                                                                                                           Rural population
                      50

                        0
                            1960            1970            1980            1990            2000
                                                                   Year

                            Source: BPS Statistics Indonesia (2009), Selected Socio-Economic Indicators of Indonesia, October 2009

Half of Indonesia’s people live in rural areas and many Indonesian households are farm
households3 primarily involved in the cultivation of rice and other foods, estate crops
(such as rubber, coconut, palm oil and coffee), livestock and poultry and fishing.

    Table 1.4: Employment status of working population: August 2008
     Employment status                                             People, millions                               Share
     Self Employed                                                         42.7                                     41.7
     Employer                                                               3.0                                      2.9
     Employee                                                              28.2                                     27.5
     Casual employee                                                       11.2                                     10.9
     Unpaid Worker                                                         17.4                                     17.0
     TOTAL                                                               102.5                                    100.0
    Source: BPS Statistics Indonesia, National Labour Force Survey 2008
    http://www.bps.go.id/tab_sub/print.php?id_subyek=06%20&notab=3 accessed February 2011

Table 1.4 shows the recent employment status of working Indonesians. It shows that
the majority of Indonesians are not in formal employment. Of the more than 100
million people working in Indonesia, just 39 million are estimated to be employees.
Almost 60 per cent of working Indonesians are either self-employed or unpaid workers.
Nearly 40 per cent of the labour force is unemployed or underemployed.

Indonesia has a national unemployment rate of 8.1 per cent; more than 9.26 million
people are classified as unemployed.4 A further 31 per cent of the labour force is
classified as underemployed.5

There are high levels of poverty in Indonesia. According to national poverty
measurements, 16.7 per cent of Indonesia’s population, or 38 million people, live in

3 Of these 13 million are small landholders (gurem farm households) defined as those farm households with less than 0.5 hectares.
BPS Statistics Indonesia (2007), Selected Socio-Economic Indicators of Indonesia, March 2007
4 BPS Statistics Indonesia (2009), Selected Socio-Economic Indicators of Indonesia, October 2009
5 BPS Statistics Indonesia (2009), Selected Socio-Economic Indicators of Indonesia, October 2009

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poverty.6 Using the World Bank’s poverty measure just over 50 per cent of the
population is living on less than US$2 a day.7

According to the World Bank, 13 per cent of the population is undernourished. The
prevalence of underweight children under five years of age is around 18.4 per cent but
decreasing.8 The infant mortality rate of 30 per 1000 births is higher than that for
neighbouring countries including Malaysia (6), Vietnam (20) and the Philippines (26). 9
Life expectancy at birth is 71 years, compared to 72 years for the Philippines and 74
years for Malaysia and Vietnam. 10

1.1.3 Structure of the economy and trade

Table 1.5 shows Indonesia’s gross domestic product by sector. Table 1.6 shows
employment by sector.

     Table 1.5: Gross Domestic Product by sector (percentage share)
     Sector                                                    1990                   2000                   2009
     Agriculture                                                 19                    16                    15
     Manufacturing                                               21                    28                    26
     Mining                                                      12                    12                    11
     Trade                                                       17                    16                    13
     Finance                                                      8                     8                     7
     Construction                                                 6                     6                    10
     Transport and communications                                 6                     5                     6
     Public administration                                        7                     5                     6
     Electricity, gas, and water                                  1                     1                     1
     Others                                                       4                     4                     5
     TOTAL                                                       100                   100                 100
    Note: Finance includes ownership of dwellings. Source: Asian Development Bank (ADB), Statistical Database System,
    February 2011, accessed at www.sdbs.adb.org/sdbs/index.jsp

6 BPS Statistics Indonesia (2007), Selected Socio-Economic Indicators of Indonesia, March 2007
7 WDI
8 Government of Indonesia (2010), Report on the Achievement of the Millenium Development Goals Indonesia 2010, October 2010
9 World Bank (2011) World Development Indicators, accessed at http://data.worldbank.org/indicator/SP.DYN.IMRT.IN February

2011
10 World Bank (2011) World Development Indicators, accessed at http://data.worldbank.org/indicator/SP.DYN.IMRT.IN February

2011

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     Table 1.6: Indonesian Employment by sector (‘000 people and percentage share)
       Year                                                  2006                 2008               2010

       Sector                                         Total          %         Total       %      Total         %
       Agriculture, Forestry and Fishery            42,323      44.5          42,689     41.8    42,825      39.9
       Mining and Quarrying                            947       1.0           1,062      1.0     1,188       1.1
       Manufacturing Industry                       11,578      12.2          12,440     12.2    13,052      12.2
       Electricity, Gas, Water                         207       0.2             207      0.2       208       0.2
       Construction                                  4,373       4.6           4,733      4.6     4,844       4.5
       Wholesale, Retail, Hospitality               18,555      19.5          20,684     20.3    22,212      20.7
       Transport, Comms                              5,467       5.7           6,013      5.9     5,817       5.4
       Business Services                             1,153       1.2           1,440      1.4     1,639       1.5
       Community Personal Services                  10,571      11.1          12,778     12.5    15,615      14.5
       TOTAL                                        95,177       100         102,049      100   107,405       100
     Source: BPS Indonesia

The tables show that agriculture (including forestry) is a key sector in the Indonesian
economy, employing around 40 per cent of the workforce. Its share in GDP is somewhat
lower, reflecting the low productivity of the small and informal activities that dominate
much of the sector.

One-third of Indonesia’s GDP is exported.11 Table 1.7 shows the structure of Indonesia’s
exports in 2009. Manufactured exports were the largest category of exports in 2006 –
comprising 40 per cent of merchandise exports. Fuels and mining products were also
significant, comprising 38 per cent of merchandise exports. Agricultural exports
comprised 22 per cent of all exports.

     Table 1.7: Merchandise and service exports by category: 2009 (percentage share)
        Export category                               Value (USD million, FOB)                  Share (%)
        Merchandise exports
                Agricultural products                                26322                         22
                Fuels and mining products                            45465                         38
                Manufactures                                         47858                         40
                Sub-total                                           119646                        100
        Service exports
                Transportation                                       2381                          18
                Travel                                               6351                          48
                Other commercial services                            4499                          34
                Sub-total service exports                           13233                         100
        All exports
                Merchandise exports                                 119646                         90
                Service exports                                      13233                         10
        TOTAL EXPORTS                                               132879                        100
     Source: WTO (2011) Statistics Database Time Series, accessed at
     http://stat.wto.org/StatisticalProgram/WSDBViewData.aspx?Language=E February 2011

11Goods and services. WTO (2007), Trade Profile for Indonesia, October 2007
http://stat.wto.org/CountryProfile/WSDBCountryPFView.aspx?Language=E&Country=ID

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1.2 Indonesia’s forest-based industries

Indonesia is home to the eight-largest forest area in the world. It has the third-largest
tropical forest area (after Brazil and the Democratic Republic of Congo) and has the
largest forest area in South-East Asia. Approximately half (52 per cent) of Indonesia’s
land area is forested according to FAO data.

Indonesia’s forests host a number of commercially valuable hardwood species,
including intsia spp (traded as merbau), gonystylus spp (traded as ramin) and
numerous species within the dipterocarpaceae family.

The tropical climate and relative accessibility of the forests to urban and coastal areas
mean that Indonesia’s forests have been easily exploitable within subsistence
communities or for commercial use. Woodworking and wood crafts have a long history
within Indonesia’s myriad cultural groups.

According to some accounts, the pre-colonial kingdoms in Indonesia relied heavily upon
the exploitation of teak forests.

The Dutch East India Company (Vereenigde Oostindische Compagnie or VOC)
commenced exploiting timber in Java upon its annexation of Jakatra in 1619. The
primary use for timber at that time was shipbuilding.

Formal attempts to manage forest resources on Java did not emerge until the early
1800s and the colonization of Indonesia by the Dutch republic. The Dutch established a
Forest Board in 1808, which regulated harvesting, forest tenure and silvicultural
practices.

There are two distinct forms of forest resource management in Indonesia. These are the
plantation industry, which up until recently was dominated by teak plantations in Java,
and the selective forestry, located mostly on outer islands.

Teak plantation forestry was first developed in Java during the Dutch colonial period.
The plantation forests were eventually taken over by state-owned forest enterprises.
Over the past two decades, plantation forestry for the pulp and paper industry has
become a significant component of Indonesia’s forest industry. Pulpwood plantations
are dominated by acacia and eucalyptus species, which grow quickly in Indonesia’s
tropical climate.

Large-scale selective forestry only emerged in Indonesia in the 1970s. Prior to this,
forestry was not considered a significant revenue stream. However, the opening up of
selective concessions across the main islands, particularly Sumatra and Kalimantan,
resulted in forestry becoming Indonesia’s second-largest industry during the 1990s.
During this period, approximately 3.5 million full-time equivalent jobs were created by
the industry. According to the World Bank, forestry played a significant role in poverty
reduction in the period.12

12
  World Bank (2006). Strategic Options for Forest Assistance in Indonesia. The International Bank for Reconstruction
and Development, Washington.

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Export bans were introduced in the 1980s and 1990s to increase economic value added
in Indonesia, and to ensure a timber supply for the local industry. A log export ban was
introduced in 1985; a rough sawnwood ban was introduced in 1992. 13

Production capacity in the plywood industry grew sixfold from 2 million m3 annually in
1980 to 13 million m3 annually in 1995. At this time the plywood industry consumed
fully half of Indonesia’s forest output; 30 per cent was consumed by the pulp and paper
industries; the remaining 20 per cent went to sawmills.14

With the exception of pulp and paper, demand for wood product industries has
generally declined since then; pulp and paper demand now makes up 50 per cent of log
output in Indonesia.

The decline has been in part due to by raw material supply constraints.15 Contributing
factors here include revoking of timber licenses over concessions in production forests
due to concerns about mismanagement and corruption, and a reduction in log supplies
from convertible forest areas, a fall in international demand for plywood and greater
competition from lower cost producers.

Plantation forestry for pulpwood production using fast-growing hardwood species such
as eucalyptus and acacia has at the same time increased, as has the capacity of the pulp
and paper industries. Indonesia’s soil and climatic conditions have resulted in
achievement of plantation growth rates higher than most other parts of the world.
Access to financing, human resources and land have also given the Indonesian pulp and
paper industry an enviable comparative advantage.

 Brown, Simangunsong, Sukadri, Brown, Sumirta, Dermanwan and Rufi’ie (2005), Restructuring and Revitalisation of Indonesia’s
13

Wood-Based Industry: Synthesis of Three Major Studies, Ministry of Forestry, CIFOR and DFID-MFP, November 2005
14
     Ibid.
15Sunderlin, W. (1999), The Effects of the Economic Crisis and Political Change on Indonesia’s Forest Sector, 1997-1999, CIFOR,
November 1999, http://www.cifor.cgiar.org/publications/pdf_files/crisis.pdf

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2. Economic and Social Contribution of Indonesia’s
Forest-based Industries
Forest-based industries – comprising forestry and logging, wood and wood product
manufacturing, and pulp and paper production, make a significant contribution to
Indonesia’s economy.

    -    Combined, the sectors contribute approximately USD 21 billion to Indonesia’s GDP,
         or roughly 3.5 per cent of the national economy;

    -    The combined sectors directly employ a combined an estimated 3.76 million
         people, or approximately 1.5 per cent of the population;

    -    Pulp and paper manufacturing and forest plantations employ approximately 1.51
         million people;

    -    Wood products and pulp and paper represent around 8.3 per cent of
         manufacturing value-added;

    -    Wood products and pulp and paper represent around 9 per cent of non-mineral
         exports;

    -    In addition, forestry provides significant social benefits to rural populations.

Forestry, logging and related services such as silviculture make a significant economic
and social contribution to Indonesia. Forestry contributes roughly USD 5.1 billion
(approximately 1 per cent) to Indonesia’s GDP.

The contribution of forestry harvesting to employment is particularly significant. While
reported estimates of employment within the formal forestry sector are around 241,000
according to recent estimates, informal sector employment is much higher. Plantation
forestry alone is responsible for approximately 713,000 permanent jobs, and
approximately 549,000 full-time equivalent jobs for plantation establishment. It is also
estimated that forestry harvesting contributes approximately 1.3 per cent of government
taxation revenues.

The benefits of forestry are likely to be greatest for rural populations where alternative
income earning opportunities are scarce. Forestry operations are directly responsible for
increased employment opportunities as well as infrastructure developments in rural
communities.

Wood and wood manufacturing contributed USD 9 billion (around 1.4 per cent) to
Indonesia’s GDP in 2009. Its share of manufacturing value added was around 2.3 per cent
in the same year. According to one estimate the subsector directly employs more than 1.3
million people. The sector also makes up around 4 per cent of total non-mineral exports.

Indonesia’s pulp and paper industry is a significant contributor to the Indonesian
economy, contributing around 1.2 per cent of GDP, and around 6 per cent of

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manufacturing value-added. The industry employs around 248,000 people directly in
manufacturing operations, and makes up more than 5 per cent of Indonesia’s non-mineral
exports.

2.1 Economic and Social Contribution of Forestry, Logging and Related
Services

Forestry, logging and related services such as silviculture make a significant economic
and social contribution to Indonesia. Forestry contributes roughly USD 5.1 billion
(approximately 1 per cent) to Indonesia’s GDP. The contribution of forestry harvesting
to employment is particularly significant. While estimates of employment within the
formal selective forestry sector are around 241,000 according to recent estimates,
informal sector employment is much higher.

Plantation forestry alone is responsible for approximately 713,000 permanent jobs, and
the equivalent of 549,000 full-time jobs for plantation establishment.

The authors estimate that forestry harvesting contributes approximately 1.3 per cent of
government taxation revenues.

The social benefits of forestry are likely to be greatest for rural populations where
alternative income earning opportunities are scarce. Forestry operations are directly
responsible for increased employment opportunities as well as infrastructure
developments in rural communities.

2.1.1 Contribution to GDP

The economic role of forestry in Indonesia is significant.16

         Table 2.1: Gross domestic product of forestry (harvesting): 1985 to 2009
                    Year                      Rp, billion                  USD, billion                 Share of GDP
                    1990                         1,855                                                        0.94
                    2000                        16,343                           1.9                          1.18
                    2001                        16,962                           1.6                          1.03
                    2002                        17,602                           1.9                          0.97
                    2003                        18,415                           2.1                          0.91
                    2004                        20,290                           2.3                          0.88
                    2005                        22,562                           2.3                          0.81
                    2006                        30,017                           3.3                          0.90
                    2007                        36,154                           4.1                          0.92
                    2008                        40,375                           4.5                          0.82
                    2009                        44,952                           5.1                          0.80
         Source: BPS Statistics Indonesia, GDP at Current Market prices by Industrial Origin, 2003-200; 2004-2009
         http://www.bps.go.id/sector/nra/gdp/table1.shtml, accessed June 2008; February 2011. US$ rate calculated by
         authors.

16   Based on preliminary GDP figures reported by the Indonesian National Statistics Agency, Badan Pusat Statistik

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The Economic Contribution of Indonesia’s Forest Industries                                                     DRAFT REPORT

Table 2.1 shows the contribution of forestry to Indonesia’s GDP since 1990. It shows
that in 2009 forestry contributed USD 5.1 billion (Rp 44,952 billion) to the Indonesian
economy, almost 1 per cent of Indonesia’s GDP. Moreover it demonstrates that the
value of forestry has been increasing over the past decade.

Indonesian national accounts do not disaggregate different types of forest production
by volume. An approximation of this is to distinguish between types of forest
production (selective forestry, plantation forestry, other) by volume. This measure will
inevitably underestimate the illegal sector as well as non-reporting small-to-medium
enterprises (SMEs) in the legal sector.

Table 2.2: Estimated GDP share of plantation forestry based on output (m3), 2005-2009

Concession type                    2005                 2006                2007                2008                 2009
Large-scale selective           4,356,492.25        6,445,263.40        6,437,684.54         4,629,017.31        4,857,150.16
Small-scale selective         16,139,549.45        4,456,952.46         4,391,657.05        2,764,014.90         6,619,247.04
State-owned selective             21,539.73           28,565.65            48,033.60           97,480.29            87,827.81
Plantation                     9,897,079.25       21,981,821.99        20,614,208.77       22,318,886.03        18,953,930.33
Other sources                  1,551,064.48        1,179,880.94           705,462.15        2,191,387.09         3,802,380.78
Total                         31,965,725.16       34,092,484.44        32,197,046.11       32,000,785.62        34,320,536.12
Share of production                      31                64.5                   64                69.7                 55.2
(plantations)
Share of GDP                              0.25                 0.58                0.59                0.57                 0.44

The table demonstrates that although the GDP share of forestry has declined, the share
of plantation forestry has been increased, reaching as much as an estimated 0.59 per
cent in 2007.

Not included in national accounts are the flow on, or multiplier, effects that further
boost the production in other industries and sectors of the economy to GDP. The
multiplier effects are the additional demand for goods and services across all industries,
and related increases in GDP, resulting from greater investment in forestry and related
manufacturing.

Researchers estimate a conservative output multiplier of around 1.26 for the
Indonesian forest sector.17 That is, for every one million Rupiah invested in forestry,
GDP is estimated to increase by 1.26 million Rupiah.

2.1.2 Contribution to employment

The difficulty and variations in estimates of employment within the forestry sector,
particularly in developing economies, have been well-documented by the FAO.18

17 Nur Arifatul Ulya and Syafrul Yunardy (2005). Analisis Peranan Sektor Kehutanan Dalam Perekonomian Indonesia: Sebuah
Pendekatan Model Input-Output (Analysis of Forestry Sector Role in Indonesia Economy: an Input-Output Model Approach). See
also Abeysinghe, T. and Forbes, K (2005), Trade Linkages and Output-Multiplier Effects: A structural VAR approach with a focus on
Asia,Review of International Economics, 13 (2) p 356-75
18
   FAO (2009). Is There A Future Role For Forests And Forestry In Reducing Poverty? Working Paper No. APFSOS II/WP/2009/24 by The
Regional Community Forestry Training Center, Bangkok

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National labour statistics for Indonesia for the agriculture, fishing and forestry sectors
do not disaggregate each of these subsectors. Subsequently, estimates on the number of
people employed in forestry (plantations and harvesting) in Indonesia vary.

The most recent estimate of the number of people employed within the forestry
industry is 241,000.19 This figure is likely to be an underestimate, as it excludes a large
number of workers in the informal sector (particularly seasonal workers), small to
medium-sized enterprises and the illegal sector. KAHUTINDO, a forestry sector
estimates are significantly higher, estimating 576,521 workers in the forestry sector,
excluding forest plantation workers.

The total number of people employed in the forestry plantation sector is likely to be
much larger on account of the large, informal workforce used by the sector. The World
Agroforestry Centre and the Indonesian Climate Change Council (DNPI) estimate labour
requirements of 0.336 persons per hectare in pulpwood plantations during growing and
harvesting phases.20 During the establishment phase it estimates 3.1 persons per
hectare.

Table 2.4 presents data on forest plantation development in Indonesia. It should be
noted that while a plantation concession area can be allocated, the entire forest area is
unlikely to be planted. Provision is made for environmental values and community
needs. A further 30 per cent of all concession areas are set aside for community forestry
operations.

     Table 2.4: Forest plantation development: ‘000 ha
                                  Total plantation area                                         Annual planted area
                Year                                                   Business Units
                                  (‘000 ha, cumulative)                                              (‘000 ha)
               2001                       4,578                                 102                  79,748
               2002                       3,523                                  91                  66,972
               2003                       3,804                                  94                 115,158
               2004                       5,910                                 112                 124,691
               2005                       5,967                                 115                 131,914
               2006                       6,467                                 133                 163,125
               2007                       7,087                                 162                 231,953
               2008                       7,154                                 165                 334,838
               2009                       8,673                                 206                 291,984
               2010                       9,393                                 233                      NA
                TOTAL                                                                               1,540,383
      Source: Total HTI plantations: Ministry of Forestry (2006), Forestry Statistics 2006 , Table IV.1.4 Development of
      Industrial Forest Plantation 1989 – 2006.

The table indicates that approximately 1.54 million ha of plantation forests have been
developed over a nine-year period. In the three preceding years, approximately
584,000 ha of plantations were developed.

19
     International Labour Organization (2010). Labour Conditions in Forestry in Indonesia, Jakarta Offi ce; ILO, 2010
20
  Ekadinata A, Rahmanulloh A, Pambudhi F, Ibrahin I, van Noordwijk M, Sofiyuddin M, Sardjono MA, Rahayu S, Dewi S, Budidarsono S,
Said Z. 2010. Carbon Emissions from Land Use, Land Use Change and Forestry (LULUCF) in Berau District East Kalimantan, Indonesia.
Bogor, Indonesia: World Agroforestry Centre (ICRAF) Southeast Asia Regional Office.

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The Economic Contribution of Indonesia’s Forest Industries                                                       DRAFT REPORT

While precise planting areas are not recorded prior to this date, the numbers indicate
that at the very least, a total of 2.1 million ha of plantation forests have been established
over a 12-year period. Based on the World Agroforestry Centre’s calculation for labour
requirements this indicates an estimated 713,000 permanent jobs in plantation
forestry, and the equivalent of an additional 549,000 full time jobs annually throughout
establishment periods. This makes a total of approximately 1.26 million permanent
jobs.

These estimates do not include indirect or flow-on employment multipliers.
Researchers estimate an employment multiplier for the forestry sector of 41 jobs
created for every Rp 1 billion invested in the industry.21

The number of people dependent on these incomes is much higher; the average family
size in Indonesia among rural based families is around 5.5 people. It can be reasonably
asserted that for every forest sector employee there are at least three dependent
livelihoods. In the case of the 1.4 million people in the forest sector, this equates to
approximately 5.6 million people dependent upon the forest sector.

2.1.3 Contribution to exports (roundwood harvesting)

Indonesia has instituted a number of policy measures to discourage or ban completely
log exports. The purpose of this has been to encourage processing industries within
Indonesia. Exports of roundwood have therefore been negligible to non-existent in
recent years. The exception has been the period following the Soeharto era, or the
reformasi period. During this time, what was essentially a policy vacuum permitted
large-scale export of roundwood, with total value of roundwood exports exceeding USD
65 million.22

The export contribution of forestry – i.e. unprocessed logs – can therefore deemed to be
negligible.

2.1.4 Contribution to Government revenue

The forestry industry contributes to government revenues through the forestry license
fees, log royalty fees and a reforestation levy. In 2009 Government revenues from were
around USD 190 million.

     Table 2.5: Government forestry revenues, 1999 to 2009
                    Year                                 Rp (million)                              USD (million)
                    1999                                    3,330,000                                   376
                    2000                                    3,020,000                                   341
                    2001                                    3,305,000                                   373
                    2002                                    2,929,000                                   331

21
   Nur Arifatul Ulya and Syafrul Yunardy (2005). Analisis Peranan Sektor Kehutanan Dalam Perekonomian Indonesia: Sebuah
Pendekatan Model Input-Output (Analysis of Forestry Sector Role in Indonesia Economy: an Input-Output Model Approach). See
also Wulandari, Fitri. 2006. “Analisis Struktur dan Kinerja Industri Pulp dan Kertas di Indonesia Tahun 1994 dan Tahun 2001.” Tesis
tidak dipublikasikan. Fakultas Ekonomi Universitas Diponegoro. Semarang.
22
   UN COMTRADE data

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The Economic Contribution of Indonesia’s Forest Industries                                                     DRAFT REPORT

                    2003                                   2,723,000                                   308
                    2004                                   3,424,000                                   387
                    2005                                   3,249,000                                   367
                    2006                                   2,429,000                                   274
                    2007                                   2,115,000                                   239
                    2008                                   2,346,000                                   265
                    2009                                   1,681,000                                   190
     Source: Statistik Kehutanan (2004) as cited in Ministry of Forestry (2006) Indonesia’s Forestry Long-Term
     Development Plan 2006-2025; and Forestry Department (2009) Data Strategies table VIII.6 Lanjutan and BPS
     (2010) Socio economic indicators October 2009 table 10.2

Table 2.5 shows Indonesian Ministry of Forestry estimates of government forestry
revenue. Between 1999 and 2009 government revenue from forestry was between
US$190 million and US$376 million annually.

     Table 2.6: Government revenue from major forestry taxes and fees (million Rupiah)
          Year            License fees and        Reforestation levy        Total Rp (million)       Total US$ (million)
                            log royalties               (DR)
                        (IHPH + PSDH/IHH)
      1993/94                  405,340                   996,257                1,401,597                    665.55
      1994/95                  511,660                 1,069,703                1,581,363                    724.12
      1996/97                  614,402                 1,233,185                1,847,587                    810.14
      1997/98                  642,835                 1,253,783                1,896,618                    800.88
      1998/99                  837,114                 1,844,077                2,681,191                    578.15
      2001                   1,772,800                 3,066,010                4,838,810                    471.35
      2002                   1,593,980                 2,741,370                4,335,350                    468.12
      2003                     731,850                 1,331,730                2,063,580                    240.75
      2004                   1,301,830                 2,829,600                4,131,430                    462.12
     Source: Various sources as cite in Barr, Resosudarmo, Dermawan, McCarthy and Setiono (2006), Decentralisation of
     Forest Administration in Indonesia: Implications for Forest Sustainability, Economic Development and Community
     Livelihoods, Bogor, Indonesia, Centre for International Forestry Research, (CIFOR), 2006

Table 2.6 shows alternative estimates of government revenue from major forestry taxes
and fees by Barr and others (2006). These estimates show slightly higher forestry
revenue of around USD 450 million per annum in recent years.

It also demonstrates that the reforestation levy (DR), which finances government forest
rehabilitation activities, is one of the industry’s most significant contributors to
government revenue. License fees paid for forest concessions are much smaller (and
have been grouped with log royalties).

These revenues are shared by the three levels of government (national, provincial and
district). License fees and log royalties are highly concentrated, mainly benefiting the
timber producing regions in Sumatra and Kalimantan. 23 In 2004 forestry revenues of
US$71 billion was distributed to regional governments, including US$23, 12 and 9

23Barr, Resosudarmo, Dermawan, McCarthy and Setiono (2006), Decentralisation of Forest Administration in Indonesia: Implications
for Forest Sustainability, Economic Development and Community Livelihoods, Bogor, Indonesia, Centre for International Forestry
Research (CIFOR)

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The Economic Contribution of Indonesia’s Forest Industries                                                      DRAFT REPORT

billion in East and Central Kalimantan and Riau respectively. 24 Their value has fallen
since 1997 when the plywood production was at its peak.

The reforestation levy is used to finance rehabilitation activities. It is shared by the
central and provincial governments.

These figures demonstrate an internal underestimate of government forestry revenue
by approximately 25 per cent. Further, they underestimate the total contribution as
they do not include the company and other general taxes paid. Attempts to quantify the
costs, taxes paid and profits in the forestry industry suggest that company taxes paid by
the forestry industry could contribute an additional 1 per cent to government
revenue.25 A reasonable estimate would be that forestry harvesting contributes
approximately 1.3 per cent of total government revenues.

2.1.5 Social contribution

Indonesia’s forestry sector contributes significantly to the country’s social development
efforts.

Forestry operations contribute towards improving the economic livelihoods of some of
the poorest regions in Indonesia, playing a central role in poverty alleviation and overall
economic development. By the very nature of the work, forestry operations are located
in remote and hard-to-reach areas, many of which have little or no access to
infrastructure or social amenities, such as health or education services. The facilities
provided by forestry operations therefore form the life-line of many communities.

Infrastructure

Improved access to infrastructure and roads has been found to be highly correlated to
reduced levels of poverty. In 2005 only 61 percent of poor households in Indonesia had
access to all-year passable roads,26 and only 55 percent of the roads are considered to
be in good condition.27 Just 36 per cent of the rural population has access to improved
sanitation, compared with 67 per cent in urban centres. 28

Tackling these issues require investment. A key component of forestry operations’
contribution to the rural economy come in the form of investments in local
infrastructure, including bridge and road construction, road maintenance, funding
school facilities, operating on-site medical clinics as well as mobile clinics to serve
people living in remote areas.

24 Barr, Resosudarmo, Dermawan, McCarthy and Setiono (2006), Decentralisation of Forest Administration in Indonesia: Implications
for Forest Sustainability, Economic Development and Community Livelihoods, Bogor, Indonesia, Centre for International Forestry
Research (CIFOR)
25 Rough estimates based on an assumption that company taxes are 50 to 100 per cent of the magnitude of forestry levies and fees

as cited in Whiteman, A. (1996), Economic Rent and the Appropriate Level of Forest Product Royalties in 1996, Report No:
SMAT/EC/96/1, Indonesia-UK Tropical Forest Management Project, Jakarta, Indonesia, http://www.fao.org/forestry/11869/en/
26 World Bank (2006) , Making the New Indonesia Work for the Poor, accessed at:

http://siteresources.worldbank.org/INTINDONESIA/Resources/Publication/280016-1152870963030/2753486-
1165385030085/Overview_standalone_en.pdf
27 World Bank (2011) Data Statistics http://data.worldbank.org/country/indonesia February 2011
28
   World Bank (2011) Data Statistics http://data.worldbank.org/country/indonesia February 2011

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The Economic Contribution of Indonesia’s Forest Industries                                                               DRAFT REPORT

Financial Benefits

Local communities obtain substantial benefits from forests resources through
involvement with forestry operators. Under Indonesian law, forest operators are
required to pay direct cash payments, develop infrastructure and fund agricultural
projects under the umbrella of Community Development.29

Cash payments from forestry companies are based on the volume of timber harvested in
local operations and frequently range from Rp 20,000 to 50,000 per cubic meter.30 In
some Indonesian provinces, large-scale timber concession-holders are also required to
pay a compensation fee to communities living in and around concession sites.

A study by undertaken by the Centre for International Forestry Research (CIFOR)
surveyed the Community Development program of several major forestry companies
operating in Sumatra.31 Four plantation companies were examined; together
contributing approximately US$4.5 million towards community development over five
years. The contributions were allocated to a range of projects including infrastructure
development, education, training, agricultural projects and the funding of cultural
initiatives.

Additional benefits to local communities are derived from ‘Company-Community
Partnerships’ in forestry operations. Under these partnerships arrangements
companies share a proportion of revenue with local tree growers – often between 40
and 50 per cent of revenues. All four of the plantation companies in the aforementioned
CIFOR study participated in such partnerships.

A survey across three Company-Community Partnerships found that 93 per cent of local
tree growers received economic benefits from the partnership, while 61 per cent stated
they were happy with the social benefits derived from the scheme. 32 The study found a
number of additional benefits to the local community:

     -     Employment opportunities for community members in plantations and
           nurseries;
     -     assistance to community members as a result of social funds and road
           infrastructure established by the company;
     -     practical experience on cultivation practices not previously available for local
           growers; and
     -     access to extension services such as technology and good quality seedlings for
           plantations.

The researchers also found local governments benefited from the development of
under-utilised land through revenues, property taxes and providing income earning
assistance.

29
   (Forest Management Act No. 5/1967; GR 7/1990; Basic Forest Law No. 41/1999; GR 34/2002)
30
   C. Barr, I Resosudarmo, A. Dermawan, J. McCarthy (2006) Decentralization of forest administration in Indonesia: Implications for forest
sustainability, economic development and community livelihoods (Bogor Indonesia, CIFOR)
31
   J., Maturana, N. Hosgood, A. Suhartanto (2005) Moving towards Company Community Partnerships: Elements to take into account for
fast-wood plantation companies in Indonesia (Bogor Indonesia, CIFOR)
32
   A. Nawir, L Santoso (2005) ‘Mutually beneficial company-community partnerships in plantation development: emerging lessons from
Indonesia’, International Forestry Review Vol. 7 (3)

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The Economic Contribution of Indonesia’s Forest Industries                                                           DRAFT REPORT

Commercial forestry in Indonesia – and their associated socio-economic benefits – does
not deny local communities access to their forest resources. The terms of the IUPHHK-
HTI concession licenses (plantation licences) obligate plantation companies to set aside
30 per cent towards local use, conservation and infrastructure.33 Of that, they are
required to leave 10 per cent of their concession area under the management of local
people to provide plants that support livelihoods such as timber, fruit trees or food
crops.

33
  R. Nasi, P. Koponen, J. Poulsen, M. Buitenzorgy, W. Rusmantoro (2007), ‘The impact of Landscape and corridor design on primates in
large scale industrial tropical plantation landscape’, Biodiversity and Conservation, Vol. 17(5)

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The Economic Contribution of Indonesia’s Forest Industries                                                        DRAFT REPORT

2.2 Economic & Social Contribution by Manufacture of Wood and
Wood products

Wood and wood manufacturing contributed USD 9 billion (around 1.4 per cent) to
Indonesia’s GDP in 2009. Its share of manufacturing value added was around 2.3 per cent
in the same year. According to one estimate the subsector directly employs more than 1.3
million people. The sector also makes up around 4 per cent of total non-mineral exports.

2.2.1 Contribution to GDP (Value-added)

Table 2.7 shows the contribution of wood and wood products sectors to Indonesia’s
GDP since 2004. The left hand side shows the contribution to GDP. The right hand side
shows value-added and only includes medium and large firms.

     Table 2.7: GDP value of wood and wood products manufacturing sectors: 2004 to 2009
                    GDP value of wood and wood products,                   Value-added, medium and large firms
         Year
                       all firms (Rp billon, USD billion)                         (Rp billon, USD billion)
         2004            31,226                 3.5                           17,491                   2.0
         2005            35,248                 3.9                           16,001                   1.8
         2006            44,603                 5.0                           14,627                   1.6
         2007            54,881                 6.2                           18,015                   2.0
         2008            73,196                 8.2                           17,041                   1.9
         2009            80,135                 9.0                           18,171                   2.0
                                                                           Share of manufacturing value-added
                              Share of GDP (all firms)
                                                                                (medium and large firms)
         2004                             1.4                                               4.9
         2005                             1.3                                               4.0
         2006                             1.3                                               2.8
         2007                             1.4                                               3.0
         2008                             1.5                                               2.4
         2009                             1.4                                               2.3
     Notes: (a) Includes furniture; (c) Excludes furniture and plating material; Source: BPS Statistics Indonesia, GDP at
     Current Market prices by Industrial Origin, 2004-2009 and Value Added by Subsector, 2001-2009
     http://dds.bps.go.id/eng/tab_sub/view.php?tabel=1&daftar=1&id_subyek=09&notab=3 , accessed February 2011.
     Calculated at current exchange rate of 1 IDR: 0.000112233 USD

Medium and large firms contributed the majority of value added in the wood and wood
products manufacturing sectors.

Not included in national accounts are the flow on, or multiplier, effects that further
boost the production in other industries and sectors of the economy to GDP. The
multiplier effects are the additional demand for goods and services across all industries,
and related increases in GDP, resulting from greater investment in forestry and related
manufacturing. Researchers estimate multipliers of between 1.88 and 1.97 for timber
processing in Indonesia, using plywood and sawnwood as examples.34 That is, for every

34USAID (2000). Overview Of Commercial Forestry Sector: Analysis of BPS Survey of Manufacturing. June 2000. NRM Program
Policy and Planning Group & Protected Areas and Forest Management Group. See also Abeysinghe, T. and Forbes, K (2005), Trade
Linkages and Output-Multiplier Effects: A structural VAR approach with a focus on Asia,Review of International Economics, 13 (2) p
356-75

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